Swiss central bank readies for FX intervention if safe haven franc strengthens

The Swiss National Bank (SNB) in Bern, Switzerland, on Thursday, Dec. 12, 2024. Stefan Wermuth | Bloomberg | Getty Images

The Swiss National Bank said on Thursday it is ready to intervene in foreign exchange markets if a rebound in demand for the safe-haven franc drives the currency higher. It came as the central bank left its main policy rate unchanged at 0%, in a move widely expected by markets, keeping borrowing costs well below those seen in other major economies. In a statement, Martin Schlegel, chairman of the SNB's Governing Board, said the outbreak of the Middle East conflict on Feb. 28 initially heaped upward pressure on the Swiss franc, as investors sought out its safe-haven status. That pressure has since eased, but the SNB still faces a tricky policy balance — and Schlegel said the central bank remains willing to act against any "rapid and excessive appreciation" of the franc, which would jeopardize economic stability.

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"If necessary, our readiness to intervene in the FX market is increased," he added in comments to CNBC's "Squawk Box Europe" later on Thursday. "Uncertainty is still very high, so much depends on the situation in the Middle East, and also a strong and rapid appreciation of the Swiss franc could endanger price stability in Switzerland. Therefore, we still have this increased willingness to intervene in the FX market." Announcing its rates decision Thursday, the SNB said inflation in Switzerland has ticked higher since its last monetary policy assessment — albeit relatively low by global levels — increasing to 0.6% in May from 0.1% in February, due to higher energy prices resulting from the Iran conflict. But the central bank said medium-term inflationary pressure was virtually unchanged over that period.

Interest rate differential drives demand

Inflationary pressure in developed economies is expected to remain elevated this year, despite a peace settlement within reach, and other major central banks are tilting towards rate hikes later this year. "As the interest rate differentials with other countries have widened, the Swiss franc has depreciated somewhat. However, the geopolitical situation remains uncertain. The risk of strong upward pressure thus persists," Schlegel said. The European Central Bank last week became the first major monetary authority to move, hiking its key interest rate by a quarter-point to 2.25% earlier this month in a bid to ward off inflationary pressure. The Federal Reserve's Federal Open Market Committee left its benchmark rate of 3.5%-3.75% unchanged Wednesday, but hinted at potential rises later in the year.

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